It refers to an unrealistic sense of superiority, a sustained view of oneself as better than others that causes the narcissist to view others with disdain or as inferior. It also refers to a sense of uniqueness, the belief that few others have anything in common with oneself and that one can only be understood by a few or very special people.
Narcissistic criteria 
The grandiosity section of the Diagnostic Interview for Narcissism (DIN) (Second edition) is as follows:
Securely buttressed by such self-beliefs, 'in a grandiose identity...all that is unpleasant to my self-image I can ditch. I can look down my nose with contempt at the childlike ways of my fellows, and I can get rid of my infantile self by pushing somewhere' outside myself. However the downside to putting myself into a grandiose state is that 'the grandiose self is extremely vulnerable, and...if something does not go my way, I make a great fuss, because I am a king who has been frustrated'.
In mania 
In mania, as opposed to narcissism, grandiosity is typically more pro-active and aggressive. Thus 'the manic begins by promoting himself in the family hierarchy...moves backward to grandiose statements of the high rank and quality of his forbears, and forward to an exalted view of what he proposes soon to accomplish'. Alongside with 'the individual's imputing quite grandiose personal properties to himself...there will be alterations in the overreacher's subjective sense of himself'. At the same time, he or she may 'become tremendously expansive and feel very big and powerful, and start all kinds of over-ambitious projects...going back to being a big balloon.'
Grandiosity is distinct from grandiose delusions, in that the sufferer has insight into their loss of touch with reality (they are aware that their behavior is considered unusual). The distinction is however not always clear-cut. Classic psychoanalysis considered that 'there are even transitions from daydreams to delusions': the fact that 'narcissistic daydreams are actually believed in and become delusions, [&] that the patients feel themselves as king, president, or God is due to the loss of reality testing'. Although these daydreams can become reality, they often are not on the grand scale envisioned by the sufferer.
Psychoanalysis and the grandiose self: Kernberg and Kohut 
Otto Kernberg described what he called a 'pathological grandiose self' - something consisting of a threefold 'condensation of some aspects of the real self (the "specialness" of the child reinforced by early experience), the ideal self (the fantasies and self-images of power, wealth, omniscience, and beauty...) and the ideal object (the fantasy of an ever-giving, ever-loving and accepting parent)'.
Kohut saw the grandiose self as a normal part of the developmental process. Only where this latter went astray, producing 'vertical splits between... '"I am grand" and "I am wretched" - with very little communication between them' - would a narcissistic disorder set in. Kohut's recommendations for dealing with the patient with a disordered grandiose self was that the analyst has 'only one function: to reflect and echo his grandiosity' for a considerable period, in order to gradually bring about 'the integration of the grandiose self into the structure of the reality ego'.
See also 
- Diagnostic and Statistical Manual of Mental Disorders Fourth edition Text Revision (DSM-IV-TR) American Psychiatric Association (2000)
- Ronningstam, Elsa F. Identifying and Understanding the Narcissistic Personality (2005)
- Gunderson J, Ronningstam E, Bodkin A The diagnostic interview for narcissistic patients Archives of General Psychiatry, 47, 676-680 (1990)
- Neville Symington, Narcissism: A New Theory (London 1993) p. 74 and p. 87
- Symington, p. 49
- Erving Goffman, Relations in Public (Penguin 1972) p. 421
- Goffman, p. 413 & n
- Robin Skynner/John Cleese, Families and how to survive them (London 1994) p. 168-9
- Otto Fenichel, The Psychoanalytic Theory of Neurosis (London 1946) p. 444 and p. 421
- Otto F. Kernberg, Borderline Conditions and Pathological Narcissism (London 1990) p. 265
- Josephine Klein, Our Need for Others (London 1994) p. 222
- Allen M. Siegal, Heinz Kohut and the psychology of the Self (1996) p. 95